Judge Jed Rakoff continues to poke and prod the SEC about how the agency negotiates consent judgments. In SEC v. Vitesse Semiconductor Corp.(Download SEC.VitesseSettlement), the Judge approved the settlement before him, but made it very clear that he has serious difficulties with the SEC's practice of accepting settlements in which the defendants neither admit nor deny the SEC's allegations and whether the practice meets the standards necessary for approval by the court.

The complaint alleged that for more than a decade Vitesse engaged in fraudulent revenue recognition practices and stock options backdatings, allegedly orchestrated by the four individual defendants, the CEO, the CFO, the Controller and the Manager of Finance. In the Judge's words:

Simultaneous with filing the complaint ..., the SEC -- confident that the courts in this judicial district were no more than rubber stampes -- filed proposed Consent Judgments against Vitesse, Mody, and Kaplan without so much as a word of explanation as to why the Court should approve these Consent Judgments or how the Consent Judgments met the legal standards the Court is required to apply before granting such approval.

After receiving a written submission from the SEC and convening a hearing (at which the Judge did not grant the request to excuse the attendance of the attorneys representing the individual defendants), the Judge was satisfied that the financial terms, although modest, and the injunctive terms of the proposed settlement met the standard of "fair, reasonable, adequate and in the public interest."

The Judge found much more troubling the requested judicial approval of settlements in which the defendants resolve the serious allegations of fraud brought against them "without admitting or denying the allegations of the Complaint." Although acknowledging that this is a longstanding policy, the result is a

stew of confusion and hypocrisy unworthy of such a proud agency as the SEC. The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the SEC; but, by gosh, he had better be careful not to deny them either (though, as one would expect, his supporters feel no such compunction). Only one thing is left certain: the public will never know whether the SEC's charges are true, at least not in a way that they can take as established by these proceedings.

Judge Rakoff ultimately decides that the issue is of less significance in this case because the two individual defendants have already admitted their guilt in parallel criminal proceedings and the corporate defendant effectively admitted the allegations by contributing $2.4 million of its stock to a class action settlement and paying a $3 million penalty in the Consent Judgment, leaving it with less than $1.5 million in net operating cash flow. However, the Judge concludes by describing these as "unusual circumstances" and making clear that he is reserving for the future ""substantial questions of whether the Court can approve other settlements that involve the practice of 'neither admitting nor denying.'"